Russian ETFs Are Underwater, But These 7 Stocks Have Mitigated Their Fall Into Negative Territory

Russian equities have had a difficult year compared to many of their peers. In a year when the MSCI Emerging Markets Index has risen 30% until November 13, the MSCI Russia Index has fallen 1%. It is one of only three MSCI country indices in the emerging markets universe which is in the red for the year, Qatar and Pakistan being the other two.

Of the five ETFs investing in Russian equities and traded on US exchanges, two – the VanEck Vectors Russia ETF (RSX) and the iShares MSCI Russia Capped ETF (ERUS) – are broad-based and non-leveraged.

Between the two, US investors have shown a clear preference for the ERUS as shown in the graph below.

Though the year had begun well for the RSX, its fortunes changed from the beginning of March with its shares outstanding going into a broad decline since. On the other hand, the ERUS has seen increased purchases, though it has mostly come in fits and starts instead of continuous flows.

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Investor flows exhibits the same trend, as shown in the graph below.

In YTD 2017 until November 13, the ERUS has seen net inflows of $186 million while the RSX has seen net outflows of $604 million, according to Bloomberg data. Even among ETFs listed outside of the US, the ERUS has attracted the most inflows in the year so far. It is followed by the France-incorporated LYXOR RUSSIA (Dow Jones Russia GDR) UCITS ETF – C ($105 million) and Luxembourg-registered db x-trackers MSCI Russia Capped Index UCITS ETF ($74 million).

However, among the US-listed funds, the RSX still remains the larger of the two with $2 billion in assets compared to $650 million for the ERUS.

Head above water

In terms of performance, unlike the MSCI Russia Index, the two ETFs have been able to keep their head above water with the RSX (4.7%) edging out the ERUS (3.6%) in YTD 2017 until November 13.

There’s not much difference in terms of the number of holdings with both invested in about 30 instruments. Further, the expense ratios are nearly the same as well. However, while the ERUS tracks the MSCI Russia 25/50 Index, the RSX follows the MVIS Russia Index.

Portfolio composition difference which explains performance

Though stocks from the energy sector form the biggest chunk of the portfolios of both funds (40% for RSX and 47% for ERUS), there is marked difference in the rest of the composition.

The two most significant ones are the exposure to financials and information technology sectors. While financials forms a quarter of the portfolio of ERUS, it forms only 15% of the RSX. Meanwhile, tech stocks form half of the weight of financials in RSX while the ERUS is not invested into the sector at all.

In terms of contribution to returns, financials are by far the highest contributing sector to the ERUS with materials being a distant second. Telecom services were the only other sector to contribute positively to the fund in the year so far.

On the other hand, stocks from the information technology sector have led gains for the RSX, followed by those from financials and materials sectors in that order. The difference between the contributions of these three sectors is not as significant as it is in the top three contributing sectors of ERUS. Consumer staples was the only sector which has dragged on the returns of the RSX in YTD 2017.

Stocks which have helped gains

The sponsored American Depository Receipts (ADRs) and the common shares of Sberbank of Russia (SBRCY) from financials have been the top two contributors to the ERUS. PJSC Mining and Metallurgical Company Norilsk Nickel (NILSY) from materials was the third largest contributor.

Though the energy sector overall has been a negative contributor to ERUS, shares of PJSC Tatneft (OAOFY) come in at fourth highest in terms of individual contributors, with the biggest five being completed by PJSC Mobile TeleSystems (MBT).

For the RSX, ADRs of SBRCY have been the highest positive contributors in the year so far. And OAOFY and NILSY find themselves ranked third and fourth respectively.

The information technology sector rounds out the top five list for ERUS, with search-engine provider Yandex N.V. (YNDX) emerging as the second highest contributor to the RSX in YTD 2017 while the Global Depository Receipts (GDRs) of online communication and entertainment services provider Mail.Ru Group Limited (MLRYY) edges out MBT for the fifth spot.